Holding The Tigers

In the arc of history, all great powers have their day. Even confining our
glance to the modern era, countries such as Spain, France, and Great Britain
all had periods of unrivalled power across the world stage. Today, the United
States reigns as the world's sole superpower - but the wheel of fortune is
turning. The US is being credibly challenged by rising powers in the developing
world, like India and China. It is a process that will have huge implications
for investors over the coming years.

In the 1990s, following the fall of the Soviet Empire and the privatization
of communist China, commercial trade opened up on a worldwide basis. Exporters
in America and Europe (the West) cheered at the promise of vast numbers of
potential consumers in these new markets. What few realized was that these
markets were populated by people who had been denied upward mobility for decades
and were ready and eager to work hard for small gains in prosperity.

In the battle between the developed and the emerging, the first round went
to the West, as our major companies exported heavy equipment, including aircraft
and construction equipment, mostly to emerging governments.

In the second round, entrepreneurs from the emerging markets, many educated
in Western universities, imported technologies and imitated management techniques
from the West. With access to cheap, hard-working labor, some start-ups achieved
spectacular results and grew rapidly. Of those, some became giants and competed
on the open markets of the West. In China's case, exporters were aided by a
currency manipulated downward (at the expense of domestic savers and consumers).

In the third round, the balance of trade changed for the first time in centuries
as countries in the West accumulated vast trade deficits. At the same time,
many Western exporters found their overseas markets captured by the new 'Tigers'
from the developing world. Soon, even their domestic markets were overrun with
inexpensive foreign goods. With bloated welfare systems, high levels of regulation,
and aging infrastructure, Western economies were unable to compete on price
or quality.

In the fourth round, emerging economies, particularly China, began an unprecedented
scheme of consumer financing for the West. Pieces of this policy include the
yuan/dollar peg, the stockpiling of US and European government bonds, and the
subsidization of export-oriented national champions. The results are neatly
summarized by the tale of the new bullet train to be installed in California:
it will be paid for with stimulus money that America borrowed from the Chinese
government and then produced by a Chinese firm!

The West's debts have now become so great that the credit ratings of major
Western sovereigns are now in question and endemic default threatens the fabric
of Western economies and social life.

Meanwhile, the Tigers' accumulating real wealth has allowed them to invest
in new capital goods and infrastructure. As a consequence, a large middle class
is developing, estimated at some 500 million people in China alone. Many of
these people, given the first taste of economic possibilities, are keen to
acquire luxuries, such as refrigerators, automobiles, and houses, which once
were seen as the preserve of Western consumers. Given the spectacular rate
of development over recent years, it is highly likely that even high-tech products
will increasingly be designed, marketed, and sold locally within Tiger economies.

Many now argue that it will take time for the middle classes of the Tiger
nations to accumulate the wealth of those in the West. However, it must be
realized that while currently poorer than their Western counterparts, their
potential is virtually unlimited. The Tigers have vast savings and capital
resources, whereas the West has exhausted much of its capital through consumption.
They have access to the oil resources of the Middle East and North Africa,
while the United States has made an enemy of itself there. They have billions
of people hungry for access to food, shelter, and clean water, whereas we have
a declining population unimpressed with a year-old iPod. Finally, the people
of the Tiger nations are still self-reliant and untainted by the corrosive
effects of socialist entitlements, while Westerners will take to the streets
at even a mention of cuts.

The United States has gone from hegemony to decline in a relatively short
time-frame. It seems, as history marches forward, that each empire's collapse
is quicker than the previous. That may be the case this time, yet again. Since
the dawn of the 21st century, it has been clear to me that, if current trends
continue, this era belongs to the developing world. The US may have had its
day, but the sun is now rising across the Pacific.

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John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.